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INTERNATIONAL

- US quarterly earnings got off to a good start with better than expected results from benchmark companies Alcoa and Intel. However, earnings are a lagging indicator, and the outlook presented on release is often more important, illustrated by JPMorgan which although beating expectations issued a cautious outlook, causing the share price to decline.

- US wholesale sales unexpectedly fell in May by 0.3 % month-on-month the 1st decline since March 2009 and against a 0.5 % consensus forecast increase. Total inventories increased 0.5 % higher than the 0.4 % consensus forecast, taking the inventory-tosales ratio, a measure of how long it would take to sell stocks at the current sales
price, to 1.14 months from April’s 1.13 months.

- The Philadelphia Fed reported a weaker than expected factory activity index, dropping in July to 5.1 against a consensus forecast 10. The New York Fed reported its manufacturing index fell to 5.08 against a consensus forecast 18.

- US producer price inflation fell for a 3rd straight month in June by -0.5 % year-on-year after falling -0.3 % in May and more than the consensus forecast -0.1 %.

Follow up:

- US retail sales fell for a 2nd straight month in June by 0.5 % month-on-month exceeding the 0.2 % consensus forecast decline, and following a revised 1.1 % decline in May.

- The US trade deficit grew by 4.8 % in May to $42.3 billion against expectations for a slight reduction in the deficit. Imports from China increased by nearly 12 % inflating the trade gap with China by more than 15 % to $22.3 billion, the biggest since October 2009.

- The US Fed reported in its June meeting minutes that the “economic outlook had softened somewhat”, revising its 2010 US economic growth forecast lower to 3-3.5 % from the earlier April estimate of 3.2-3.7 % and its 2010 consumer inflation forecast to 1-1.1 % from 1.2-1.5 %. The Fed said the economy may not recover fully to its “longer-run path” for 5 to 6 years.

- China’s economic growth rate slowed from 11.9 % year-on-year in the 1st quarter to 10.3 % in the 2nd quarter below the consensus forecast 10.5 %. Growth is expected to slow to 9 % in the 4th quarter according to consensus forecast. Meanwhile growth in industrial output slowed to 13.7 % against an expected 15 %, and retail sales to 18.3 % versus an expected 18.8 %. In consolation consumer price inflation fell more than
expected to 2.9 % against a consensus forecast 3.3 %.

- China’s property prices dropped in June by 0.1 % month-on-month, the 1st decline in 16 months as measures to slow speculative real estate investment start to take effect.

- China’s exports increased in June by 43.9 % year-on-year to $137.4 billion while the trade surplus more than doubled to $20 billion, its highest in 8 months. However the month-on-month gain in exports shows slowing momentum, rising only 4.2 % after gains of more than 10 % in the previous 2 months. A report from Mizuho Securities predicts exports may decelerate sharply on a combination of weakening demand from Europe and the US, a stronger Chinese currency, higher Chinese wages and reduced export tax rebates.

- China’s copper imports fell in June for a 3rd straight month by a greater than expected 17.3 % month-on-month to 328,231 tonnes.

- The Bank of Spain reported Spanish banks borrowed a record 126.3 billion from the ECB in June up 48 % from the previous month, indicating tight access to funding.

- Moody’s debt rating agency cut Portugal’s sovereign debt rating by 2 notches in a widely expected move, catching up with a similar earlier downgrade by rival Standard & Poor’s.

- Greece successfully auctioned 1.625 billion euro in new 6-month Greek Treasury bills in its 1st auction since it received emergency funding from the EU and IMF in May and at an interest rate slightly below the 5 % being charged under the emergency funding deal. The news helped the euro continue its strengthening trend against the US dollar
to $1.275 on Wednesday. It was as low as $1.185 in early June.

- UK consumer price inflation fell in June to 3.2 % year-on-year from 3.4 % in May but above the consensus forecast 3.1 % and the Bank of England’s 2 % target. Especially concerning was the increase in “core” inflation, which excludes the volatile food and petrol categories, from 2.9 % to 3.1 %. The data increased chances of an interest rate increase from the current 0.5 %, helping sterling to a 2-month high of $1.53 vs. USD.

- Shares in BP gained 9.4 % on Monday on positive news regarding a new containment cap on its leaking Macondo wellhead. The share’s rally accounted for the FTSE 100 index’s entire 34-point gain on the day. The US listed shares gained a further 7 % in New York trade on Thursday on reports the oil leak had stopped.

- National Australia Bank’s monthly survey of business conditions recovered its previous month’s decline in June rising to +8 from +6 in May. The forward orders category increased from +6 to +7 driven by strength in recreational and personal services, transport, storage and mining.

- Gold holdings of SPDR Gold Trust the world’s largest bullion exchange traded fund, increased on Monday to 1314.819 tonnes, the 1st increase since retreating from a record 1320.436 tonnes in late June.

SA ECONOMY

- The JSE All Share index is trading on a historic price to earnings multiple of 16.8 X not especially cheap compared with the 14.4 X average over the past 15 years. However, equity markets are forward looking and based on the current 1-year consensus aggregate earnings forecast for the index, it is trading on a forward price to earnings multiple of 10 X below the 13 X average over the past 15 years. Earnings are forecast to grow over 50 % boosted by the base effect of low comparative earnings stemming from the recent recession. Yet, some caution is required due to slowing momentum in the global economic recovery. A deteriorating global financial outlook would impact earnings of SA companies, and undermine the achievement of a 10 X price to earnings ratio a year from now.

- In a sign of rising confidence in SA financial markets, the value of SA merger & acquisitions deals in the 1st half of 2010 is up 110 % year-on-year in US dollar terms. Key deals include the tie-up between Momentum and Metropolitan, and between Gold Reef and Tsogo Sun. The 2nd half 2010 has got off to a flying start with the announcement this week of 2 major deals including the purchase by Naspers of a 28.7
% stake in Russian internet company Digital Sky Technologies, and the offer by Japan’s telco company NTT to purchase Dimension Data.

- Retail sales grew in May by 4.6 % year-on-year in real terms, up from 2.9 % in April and ahead of the consensus forecast 3.7 %. For the 1st time in over 2 years all 7 categories recorded real growth, including recent laggard hardware, paint and glass which recovered to positive growth from -10 % in April. The standout performer was the household furniture, appliance and equipment category with growth of 17.7 %, attributed to purchases of TV and audio equipment ahead of the World Cup. While overall retail sales growth is likely to slow immediately following the World Cup, 1st quarter growth in real disposable income and benign inflation leading to a continuation of low interest rates, remains supportive for the retail sector.

KEY MARKET INDICATORS

YEAR TO DATE %
JSE All Share - 2.19
JSE Fini 15 +4.29
JSE Indi 25 +1.40
JSE Resi 20 - 9.44
R/USD - 1.94
S&P 500 - 4.02
Nikkei - 9.58
Hang Seng - 8.39
FTSE 100 - 5.68
DAX +1.31
CAC 40 - 10.11
MSCI World - 7.15

TECHNICAL ANALYSIS

- The euro has regained the key $1.25 resistance levels against the dollar which suggests a change to a dollar weakening trend may be underway.

- The rand has broken weaker against the US breaching the key R/$ 7.51 level. A break above R/$ 7.78 would open a target of R/$ 8.23. Commodity currencies have benefited from rising demand for commodities, and rising global risk appetite, fuelling the international carry-trade where funds are borrowed in low interest rate currencies to be invested in higher yielding currencies such as the rand. A reversal of the carrytrade may spark rapid declines in commodity currencies.

- The 10-year US Treasury bond yield has fallen sharply over the past month breaking below resistance at 3.30 % and opening a new target of 2.75 %.

- SA gilt yields broke below key resistance with the benchmark 157 bond falling decisively below its previous 8-8.9 % trading range. Its yield could target the 2008 low of just above 7 %.

- The JPMorgan global bond index is again outperforming the MSCI world equity index for the 1st time since early 2009.

- The MSCI world equity index has made a double-top formation and broken below the 200-day moving average, suggesting further potential declines of 10-15 %.

- The S&P 500 index has indicated a short-term top formation which could be the start of a more significant correction. Key support levels at 1150 and 1125 have been broken suggesting further declines.

- The VIX volatility index has risen sharply breaking its 2009 and 2010 downward trend.

- Most equity markets remain above support levels although 2 key ones, the S&P 500 and FTSE 100 are breaking down and may fall a further 10 %.

- The Coppock Curve is a long-term momentum indicator with an excellent track record in identifying major market bottoms. It shows that the March 2009 low was a longterm low unlikely to be broken.

- The oil price bull market is intact in spite of losses back to the $74 a barrel level.

- Gold has moved far ahead of any significant support levels, so that while the target of $1275 is still intact, any consolidation may be dramatic possibly to as low as $1000.

- Base metals have fallen, are testing support and vulnerable to a deeper sell-off. Copper can be viewed as a lead indicator for equity markets.

- The All Share index has broken below near-term support at 28300 suggesting further losses to 9-month uptrend support and the 200-day moving average at 26700. A close below 26000 would confirm a head-and-shoulders top with a downside target of 12 %.

- Industrials are expected to narrowly outperform Financials, with Resources likely to be the underperforming sector. Financials are close to breaking a 12-year trend of underperformance against the All Share index which if successful would generate a powerful relative long-term buy signal for the sector. Small cap stocks are offering good value relative to the All Share likely to bounce from a 2-year relative downtrend.

BOTTOM LINE

Technical analysis should be used only as a timing tool, and should not take the place of fundamental analysis when making investment decisions. After all it would not be advisable to say buy a house or a farm based on technical analysis. Equally the decision to buy or sell a
share or other financial investment should be based on its own fundamental merits, and not on what the charts are saying.